Iowa Court: Construction Defect Remedy Doesn’t Extend to Banks, Developers

December 19, 2014

The Iowa Supreme Court has declined to give banks and real estate developers the same legal remedy that protects homebuyers from defective construction.

In a pair of decisions, the court refused to expand Iowa’s implied warranty of workmanlike construction, which allows buyers and renters to sue builders for major housing defects.

Courts in Iowa and across the country created the doctrine to provide a remedy for consumers living in poorly built homes that can require expensive repairs and endanger their health. The doctrine says buyers can sue for damages when homes are not constructed in a “good and workman like manner” and they had no reasonable way of discovering the defects.

In one case decided on Dec. 12, a developer who bought land in Sioux City to build townhouses wanted to sue the seller for allegedly substandard soil work. The developer argued the land had improperly compacted backfill that required extensive work before construction.

Justice agreed 6-0 that the implied warranty of workmanlike construction does not extend to the sale of lots with no dwellings. The goal of the doctrine — to protect residents from substandard living conditions and address “the disparity in expertise and bargaining power” between consumers and builders — does not apply, Justice Thomas Waterman wrote.

“We decline to extend the implied warranty to the sale of land between developers able to protect themselves through express contract terms and simple soil tests,” he wrote.

In the second case, a bank that received mold-infested apartment buildings in Postville through foreclosure wanted to sue the builder. The bank wanted to recover costs of holding the buildings and repairing windows and air-conditioning units that were improperly installed.

In a 4-3 decision, Waterman wrote that there is “no valid policy reason” to extend the doctrine to foreclosing lenders that can protect themselves against construction defects in other ways, including inspections and contract terms.

Dissenting Justice Daryl Hecht said builders should be held accountable for damages related to shoddy construction, regardless of whether banks or ordinary buyers are impacted by them.

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